Rising Costs Affecting Raw Materials for the Print Industry

--- ODJ Interview Rising Costs Affecting Raw Materials for the Print Industry By Carro Ford March 20, 2007 -- Think gas prices are making it more expensive to get to work? The same rising petroleum costs are also affecting what you do when you get there--and impacting your bottom line. Printers are seeing cost increases not only in their finishing products, but also in their inks and print substrates. It's a significant trend with staying power. "We are seeing five to seven percent increases," said Jerry Hill, Vice President of Sales and Marketing, Drytac Corporation. "Almost all the components used to make our overlaminate and adhesive products have risen," said Angela Mohni, Director of Marketing, Neschen Americas. This includes base film carriers such as PVC, polyester and polypropylene. The higher costs of petroleum in particular are filtering down into other areas, including the printing sector. "We have seen unprecedented and relentless increases over a period of three years in plastic substrates and adhesive. This is a complex phenomenon, but it is clear there is limited availability of some of the highly engineered components of our laminates. Simultaneously, significant increases in the cost of oil and spiking demand for all petrochemical products out of Asia have created a situation in which suppliers have more customers than capacity, and they are able to demand higher prices," Gideon Schlessinger, GBC Vice President of Marketing, Product Technology and Development. Fueled by Rising Petroleum Costs The higher costs of petroleum in particular are filtering down into other areas, including the printing sector. Crude oil pricing rose 110 percent between January 2004 and July 2006. Since then, production has increased, and pricing has eased, but remains 60 percent higher than in early 2004, according to Diane Parisi, Vice President of Procurement for the Flint Group. "Higher fuel costs are certainly fueling most of the increases," explained Mohni. "The basic chemical infrastructure behind the adhesive and films in our sector is based on natural gas. U.S. natural gas pricing per thousand cubic feet has nearly doubled since 2000. The pricing was $3.68 in 2000 and year to date 2006 is $7.51." Petroleum-based products like polyester and vinyls are among those most affected, but they are not the only ones. Costs of acrylates, the main components in adhesive products, have risen 18 to 30 percent since December 2005, according to Mohni. Another affected component in overlaminate and adhesive products is paper-based release liner. "Domestic pulp paper pricing is up 18 percent year on year through November of 2006," she said. Tracing It Back to the Source Of the two percent of raw materials that don't derive from petroleum or gas, some come from trees or crops, others from mines. All are affected by supply and demand. Any materials that are in high demand in Asia or materials derived from those that are in high demand and any materials that are petrochemical derivatives, particularly those that are highly engineered," said Schlessinger. Of the two percent of raw materials that don't derive from petroleum or gas, some come from trees or crops, others from mines. All are affected by supply and demand. The further from the original source a raw material is produced, the more steps and cost required to produce it, and the more complicated the supply-side becomes. Pigment feedstocks are a good example. Feedstocks are intermediate materials that are further processed to produce the materials that go into inks. "BON acid (Beta Oxynaphtoic acid) accounts for nearly 50 percent of the material required to make most red pigments," said Parisi. "If we trace back toward its source, we find naphthalene, which is refined from both petroleum and coal tar. BON acid is five steps removed from its crude oil origins, and its price has jumped 20 percent since the beginning of 2006." In the Grip of Tight Supplies When it comes to raw materials, many factors affect the supply chain, like geopolitical events, weather, crop yields, labor issues and environmental regulations. Demand heats up as new uses are found for the materials and as new users begin to compete for them. Tight supplies are also a threat to the printing ink industry. Because ink manufacturers buy relatively small volumes of raw materials compared to other users, they have little leverage in a competitive environment. "If raw material suppliers decide to favor more profitable outlets, prices will continue to rise, and ink manufacturers could even find themselves without key raw materials," said Parisi. The issue crosses color boundaries -- blue and green pigments are not faring much better. "Since the beginning of 2006, we have seen dramatic increases in the price of cuprous chloride and phthalic anhydrate, both raw materials based on copper," said Parisi. "Copper prices are 60 percent higher than at the end of 2005 due to strong global demand for construction materials and electronics, and a severe shortage caused by a strike at the world's largest copper producer in Chile. China is also a major producer, but its own demand for copper in construction has grown 15 percent over the past five years." Pass It On For now, the trend seems to have stabilized for adhesives and base films, according to Mohni, but don't get too comfortable. "Paper prices are much more sensitive to fuel prices, and they are still volatile. I still believe we will see ongoing increases on all components." "I think it will continue for some time," noted Hill. "Also, this situation is affecting general and administrative costs as well. Passing along an increase is a tough decision, but selling and losing money is not an alternative." If raw material suppliers decide to favor more profitable outlets, ink manufacturers could find themselves without key raw materials. "The feedback I get is that print service providers are passing on some of the increases. They have to in order to be profitable," said Mohni. She suggests relating the increases to everyday things that customers understand like the price of fuel for your car or the cost to heat your home. "I would also offer rebates or discounts for customers who sent more or all of their printing business my way. I would offset some of the cost increases by locking my customers in for more volume." One way to avoid passing on increases is to look for alternative raw materials that are less expensive. Alternative interest is high, and cost increases are sparking many evaluations, according to Hill, "but one has to weigh any loss of quality." "It's still clear that printers are not able to pass on the rising costs of materials," said Dr. Joe Webb, Director, whattheythink center for economics and research. "The industry appears to be coping with this by reducing the number of employees in non-production positions. Print buyers shifting to other media can change the costs.' "We are starting to see our best customers pass on these increases," said Schlessinger. "We had a very long period in which costs were very stable. Some people got used to that, and anybody under 35 years old may not have dealt with significant inflation before. Our market is highly competitive, but we have all squeezed profits so hard that we must pass along these increases. Customers ultimately trust those businesspeople who consistently act with integrity." You can always reach Carro Ford Weston at her new email address: carrof@earthlink.net.